BERMACO ENEGY SYSTEMS LTD, NAVI MUMBAI V. ACIT 10(3), MUMBAI

ITA 2356/MUM/2010

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3271 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 3 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-07-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 06-06-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 25-03-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SANJUKTA CHOUDHURY
• Keywords: Capital asset; Business income; Business expenditure; Additional evidence; Reasonable cause; Revenue expenditure; Capital expenditure
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUM BAI .. , , BEFORE SHRI B.R. MITTAL, JM AND SHRI SANJAY ARORA, AM ./ I.T.A. NO. 2356/MUM/2010 ( / ASSESSMENT YEAR: 2006-07 BERMACO ENERGY SYSTEMS LTD. D-73/1, TTC INDUSTRIAL AREA, MIDC TURBHE, NAVI MUMBAI- 400 705 / VS. ASST. COMMISSIONER OF INCOME TAX 10(3), MUMBAI ./ PAN/ GIR NO. AAACB 2727 N ( / APPELLANT ) .. ( ! / RESPONDENT ) ' # / APPELLANT BY : SHRI PRAMOD KUMAR PARIDA & MS. SANJUKTA CHOUDHURY ! ' # / RESPONDENT BY : MS. NEERAJA PRADHAN $ %&' ' ( / DATE OF HEARING : 06.06.2013 )*+ ' ( / DATE OF PRONOUNCEMENT : 03.07.2013 , / O R D E R PER SANJAY ARORA, A. M.: THIS IS AN APPEAL BY THE ASSESSEE ARISING OUT OF TH E ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-22, MUMBAI (CIT(A) FOR SHORT ) DATED 01.12.2009, DISMISSING THE ASSESSEES APPEAL CONTESTING ITS ASSESSMENT FOR ASS ESSMENT YEAR (A.Y.) 2006-07 VIDE ORDER U/S. 143(3) OF THE INCOME TAX ACT, 1961(THE ACT HEREINAFTER) DATED 31.12.2008. 2 ITA NO.2356 /MUM/2010 (A.Y. 2006-07) BERMACO ENERGY SYSTEMS LTD. VS. ASST. CIT 2.1 AT THE VERY OUTSET IT WAS OBSERVED THAT THE ASS ESSEES APPEAL IS BARRED BY TIME, BEING FILED ON 25.03.2010 AS AGAINST THE DUE DATE O F 03.03.2010, SO THAT IT DELAYED BY A PERIOD OF 22 DAYS. THE ASSESSEE HAS FILED A CONDONA TION PETITION, STATING THAT THE APPEAL HAD BEEN IN THE FIRST INSTANCE INADVERTENTLY FILED WITH THE OFFICE OF THE LD. CIT(A), AND IT WAS ONLY SUBSEQUENTLY WHEN THE ERROR WAS REALIZED T HAT THE APPEAL PAPERS WERE RETRIEVED FROM THE SAID OFFICE, WHICH TOOK TIME, AND FILED WI TH THE REGISTRY OF THE TRIBUNAL. THE REASONS HAVE NOT BEEN CONTROVERTED ON FACTS, AND CO NSTITUTE, IN OUR VIEW, A REASONABLE CAUSE FOR THE DELAY. THE APPEAL WAS, ACCORDINGLY, A DMITTED, AND HEARING THEREOF PROCEEDED WITH. 2.2 THE APPEAL RAISES THREE ISSUES PER ITS GROUNDS A, B & C, AND WHICH WE SHALL TAKE UP IN SERIATIM. 3. THE ASSESSEES FIRST GROUND IS IN RESPECT OF CON FIRMATION OF A DISALLOWANCE OF EXPENDITURE ON ACCOUNT OF AMOUNT/S WRITTEN OFF AT R S.49,65,446/-. THE BACKGROUND FACTS ARE THAT OF THE SAME RS.48,24,365/- REPRESENTS THE BALANCE OUTSTANDING IN THE ASSESSEES ACCOUNTS FROM M/S. JALKHERI POWER PVT. LTD. (JPPL). EXPENDITURE TO THE TUNE OF RS.69.24 LACS STOOD INCURRED (DURING FINANCIAL YEARS (F.YS.) 2001-02 TO 2003-04) ON VARIOUS EXPENSES, VIZ. SALARIES, TRAVELING, TELEPHONE, PROF ESSIONAL CHARGES, RENT ETC., ON PROJECT RELATED WORK, I.E., ON PROJECT DEVELOPMENT, IN RESP ECT OF RICE/WHEAT STRAW BASED POWER PROJECTS TO BE SETUP AT DIFFERENT LOCATIONS IN PUNJ AB BY IT IN CONSORTIUM WITH JPPL, FOR WHICH THE CONSORTIUM HAD BID TO BUILD AND OPERATE S UCH POWER PLANTS, ENTERING INTO AGREEMENT/S FOR THE PURPOSE WITH PUNJAB STATE ELECT RICITY BOARD (PSEB). THE SUMS WERE EXPENDED BY IT FOR AND ON BEHALF OF THE PROJECT OW NER, AND WERE TO BE REIMBURSED ON THE SALE OF POWER TO PSEB FROM THE NINE POWER PROJECTS ALLOTTED BY IT TO THE JOINT VENTURE (JV) CONSISTING OF THE ASSESSEE AND JPPL. HOWEVER, AS SUBSEQUENTLY THE PROJECTS COULD NOT BE SETUP, THE SAID AMOUNT REMAIN TO BE RECEIVED ; THE COMPANY HAVING NOT RECEIVED ANY AMOUNT APART FROM RS.21 LACS FROM JPPL IN THE F IRST YEAR (FY 2001-02) IN WHICH THE BULK OF THE EXPENDITURE, I.E., RS. 57.92 LACS, STOO D INCURRED. THE SAME WAS THUS WRITTEN OFF IN ACCOUNTS AS IRRECOVERABLE, AND CONSTITUTED A VAL ID DEDUCTIBLE BUSINESS EXPENDITURE, I.E., 3 ITA NO.2356 /MUM/2010 (A.Y. 2006-07) BERMACO ENERGY SYSTEMS LTD. VS. ASST. CIT IN COMPUTING THE ASSESSEES BUSINESS INCOME FOR THE CURRENT YEAR. THIS FORMED THE ASSESSEES CASE BEFORE THE AUTHORITIES BELOW. 4.1 BEFORE US, THE ASSESSEES CASE WAS THAT THERE W AS IN FACT NO JOINT VENTURE (JV) BUT ONLY A CONSORTIUM (OF PARTNERS) TO COME TOGETHER FO R DEVELOPMENT AND RUNNING THE POWER PROJECTS IN PUNJAB. COPY OF THE POWER PURCHASE AGRE EMENT (PPA) DATED 29.04.2003, PAGINATED AS PAGES 38 91, AND THE JV WITHDRAWAL CORRESPONDENCE DATED 27.03.2006 (AT PAGE 92), I.E., IN CONTINUATION OF THE PAPER-BOOK (WITH PAGES 1 TO 37F) ALREADY FILED, AND MARKED AS PAPER BOOK-II, WAS REQUESTED FOR BEING AD MITTED. ALL OTHER AGREEMENTS, IT WAS SUBMITTED, WOULD BE FURNISHED BEFORE THE ASSESSING OFFICER (A.O.), TO WHOM MATTER MAY BE REMITTED FOR CONSIDERATION OF THE SAME AND ADJUD ICATION AFRESH. ON MERITS, IT WAS SUBMITTED BY HIM THAT THE LOSS AR ISING TO THE COMPANY IS ONLY IN THE COURSE OF ITS BUSINESS AND, THUS, LIABLE FOR DE DUCTION U/S. 36(1)(VII) R/W S. 28(I). THE WITHDRAWAL FROM THE ARRANGEMENT BY JPPL AND ALSO BY THE ASSESSEE WAS DUE TO THE UN- REMUNERATIVE POWER SALE RATE/S BEING OFFERED, SO TH AT THE PROJECTS WERE NOT DEEMED VIABLE AT THOSE RATES, BEING MUCH LOWER THAN THE RATE OF R S. 4.10 PER UNIT WHICH WAS THE RATE ARRIVED AND DISCUSSED AT THE NEGOTIATION STAGE. THI S IS PARTICULARLY SO AS THE COMPANY IS ADMITTEDLY IN THE BUSINESS OF PROJECT CONSULTANTS. 4.2 THE LD. DR, ON THE OTHER HAND, WOULD RELY ON TH E ORDERS BY THE AUTHORITIES BELOW, STATING OF THEM TO BE CONSISTENT WITH THE FACTS OF THE CASE OF THE LAW IN THE MATTER. 5. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 5.1 WE FIRSTLY OBSERVE THAT THE ASSESSEES PLEA FOR ADMISSION OF ADDITIONAL EVIDENCE IS TOTAL UN-SUBSTANTIATED INASMUCH AS NO CASE FOR THE SAME HAS BEEN MADE OUT. IN FACT, THE CONTENTION THAT THERE WAS NO JV IN PLACE, BUT ONLY A CONSORTIUM, SO THAT, AS WE PRESUME, BOTH THE PARTNERS, I.E., THE ASSESSEE-COMPANY AND J PPL, WOULD BE INDIVIDUALLY RESPONSIBLE FOR THE PROJECT, AND ALSO ENTITLED TO THE PROFITS A RISING FROM THE PROJECT, IS ALSO NOT SUPPORTED BY ANY MATERIAL. THE LD. AR ON BEING SPEC IFICALLY QUESTIONED AS TO WHY THE DOCUMENTS BEING NOW PRESENTED BEFORE THE TRIBUNAL F OR THE FIRST TIME, WERE NOT PRODUCED 4 ITA NO.2356 /MUM/2010 (A.Y. 2006-07) BERMACO ENERGY SYSTEMS LTD. VS. ASST. CIT BEFORE THE AUTHORITIES BELOW, COULD NOT FURNISH ANY SATISFACTORY ANSWER. IN FACT, AT PARA 2.4 OF HIS ORDER, THE LD. CIT(A) HAS SPECIFICALLY RECOR DED AS MANY AS FIVE DATES ON WHICH THE ASSESSEE WAS GRANTED OPPORTUNITY TO PRODUCE THE RE LEVANT DOCUMENTS. FURTHER, IT WAS ALSO CONCEDED BY THE LD. AR THAT THE MATERIAL IN SU PPORT OF THE SAID CLAIM WAS NOT AVAILABLE FOR BEING PRODUCED BEFORE US, THOUGH WOUL D BE SUBMITTED BEFORE THE A.O. IN THE REMAND PROCEEDINGS, REQUEST FOR WHICH WAS MADE. WE FIND THE ASSESSEES PRAYER AS NOT MERITING ACCE PTANCE. THE POWER OF THE APPELLATE AUTHORITY TO ADMIT ADDITIONAL EVIDENCE, W HICH IS TO BE JUDICIALLY EXERCISED, CONSIDERING ALL THE FACT AND CIRCUMSTANCES OF THE C ASE, IS INCREASING CIRCUMSCRIBED BY LAW AS TO PROCEDURE, GETTING MORE STRINGENT AS THE APPE LLATE PROCEEDINGS ADVANCE FROM ONE STAGE IN THE HIERARCHY TO ANOTHER. CASE LAW ON THE MATTER IS LEGION, AND FOR WHICH WE MAY REFER TO TWO DECISIONS BY THE HONBLE JURISDICTIONA L HIGH COURT, VIZ. CIT VS. KAMAL C. MEHBOOBBANI (SMT.) [1995] 214 ITR 15 (BOM.) AND VELJI DEORAJ AND CO. VS. CIT [1968] 68 ITR 708 (BOM.). AS AFORE-STATED, NO CASE FOR ADMISSION OF ADDITIONA L EVIDENCE STANDS MADE OUT, I.E., ON FACTS. ON THE CONTRARY, THE ASSESSEE ACCEPTS TO STILL NOT HAVE THE ENTIRE MATERIAL, I.E., ON WHICH IT WISHES TO RELY UPON, WITH IT, AND WHICH IS CLAIMED WOULD BE PRODUCED BEFORE THE ASSESSING AUTHORITY. WE, ACCORDINGLY, DECLINE TO AD MIT THE ADDITIONAL EVIDENCE. IN FACT, AS SHALL BE PRESENTLY SEEN, I.E., WHILE DISCUSSING THE ASSESSEES CASE ON MERITS, THE SAME WOULD NOT MATERIALLY IMPACT THE MERITS OF ITS CASE. 5.2 WE MAY NOW EXAMINE THE ASSESSEES CASE ON ITS M ERITS. THE APPELLANT AND ITS ASSOCIATE, JPPL, ENTERED INTO A JV FOR DEVELOPMENT AND OPERATING WHEAT/RICE STRAW (BIOMASS FUEL) BASED POWER PLANTS AT DIFFERENT LOCA TIONS IN THE STATE OF PUNJAB, IN TERMS OF THE NEW & RENEWABLE SOURCES OF ENERGY (NRSE) POLICY , 2001 FORMULATED BY THE GOVERNMENT OF PUNJAB IN AN ENDEAVOR TOWARD ADOPTION OF NEW AND NON-CONVENTIONAL SOURCES OF ENERGY AS WELL AS CONSERVATION OF CONVEN TIONAL FUELS. AN OPEN, COMPETITIVE BIDDING PROCESS WAS ADOPTED, AND THE CONSORTIUM OF THE ASSESSEE AND JPPL (THE COMPANY OR THE PROJECT OWNER HEREINAFTER) ALLOTT ED NINE OF THE TWELVE SMALL (UP TO 10 5 ITA NO.2356 /MUM/2010 (A.Y. 2006-07) BERMACO ENERGY SYSTEMS LTD. VS. ASST. CIT MW) BIOMASS POWER PROJECTS TO BE SET UP IN THE STAT E OF PUNJAB, THROUGH PSEB, ACTING ON BEHALF OF THE GOVERNMENT OF PUNJAB, AND TO WHOM THE POWER TO BE GENERATED THEREFROM WAS TO BE SOLD. ACCORDINGLY, PPAS FOR AN INITIAL TE RM OF 20 YEARS, EXTENDABLE BY ANOTHER 10 YEARS, WERE ENTERED INTO BETWEEN THE PROJECT OWN ER AND PSEB, WHEREIN IT WAS AGREED THAT THE PROJECT OWNER WOULD APPROACH THE REGULATOR Y COMMISSION, I.E., PSERC, FOR APPROVAL OF THE POWER TARIFF AND OTHER COMMERCIAL T ERMS AND CONDITIONS FOR THE SALE OF POWER FROM THESE PROJECTS TO PSEB. ACCORDINGLY, THE COMPANY (PROJECT OWNER) PETITIONED PSERC VIDE PETITION NO. 14 OF 2003. VIDE ITS ORDER DATED 04.10.2005 (PB PAGES 37A- 37F), THE COMMISSION, AFTER HEARING BOTH THE PARTIE S, AS WELL AS PEDA, THE NODAL AGENCY IN RESPECT OF NRSE PROJECTS, FIXED THE POWER TARIFF AT RS.3.01 PER UNIT (FOR F.Y. 2001- 2002), THE BASE YEAR. FIVE ESCALATIONS WOULD APPLY, AND THE RATE FOR F.Y. 2006-07 SO DETERMINED WOULD REMAIN IN FORCE FOR THE REMAINING TERM OF PPA IN THE INTEREST OF THE CONSUMERS. HOWEVER, IN THE EVENT OF REVISION IN THE NRSE POLICY IN FUTURE REGARDING ESCALATION, THE PROJECT OWNERS RIGHT TO APPROACH T HE COMMISSION (PSERC) FOR SUITABLE ORDERS WAS NOT INFRINGED. AS STATED EARLIER, THIS RATE WAS MUCH BELOW THE O RIGINALLY OFFERED PRICE OF RS.4.10 PER UNIT BY PSEB, WHICH WAS EXPECTED TO BE CONFIRME D. THE APPELLANT, HOWEVER, HAD CARRIED OUT VARIOUS WORKS RELATING TO THE PROJECTS, I.E., TOWARD PROJECT DEVELOPMENT, IN ANTICIPATION. AS PER THE JV ARRANGEMENT, THE SAME W ERE TO BE INCURRED BY THE ASSESSEE- APPELLANT IN THE FIRST INSTANCE, AND BE REIMBURSED FOR THE SAME FROM THE REVENUE GENERATED ON THE SALE OF POWER TO PSEB. THE APPELLANT, HOWEVE R, COULD RECOVER ONLY RS. 21 LACS OF THE TOTAL 69.24 LACS, LEAVING A BALANCE OF RS.48,24 ,365/-. THE SAME BEING PAID ON BEHALF OF JPPL, WAS WRITTEN OFF IN ACCOUNTS ON FINDING THE SAME AS NO LONGER RECOVERABLE, AS JPPL WAS NOT INTERESTED IN PARTICIPATING IN THE PRO JECT (REFER PB PAGES 33-37). THE EXPENDITURE INCURRED WAS DEBITED BY THE ASSESSE E IN ITS ACCOUNTS TO THE ACCOUNT OF JPPL. THE SAME WERE FOR SETTING UP OF TH E PROJECT ON BEHALF OF THE CONSORTIUM. HOW, WE WONDER, COULD THE SAME COULD BE CLAIMED EIT HER UNDER SECTION 36(1)(VII), WHICH IS ALSO SUBJECT TO THE CONDITION OF S. 36(2)(I), AN D OR EVEN U/S. 28. THE CONSORTIUM IS A DIFFERENT ENTITY, WHICH HAD BID FOR, AND HAD ACCORD INGLY BEEN ALLOTTED THE POWER PROJECTS 6 ITA NO.2356 /MUM/2010 (A.Y. 2006-07) BERMACO ENERGY SYSTEMS LTD. VS. ASST. CIT BY PSEB ON BUILT, OWN AND OPERATE BASIS, ENTERING I NTO AGREEMENTS (PPAS) FOR NINE SUCH PROJECTS. EVEN IF NO SPECIAL PURPOSE VEHICLE (SPV), AS, SAY, A COMPANY WAS INCORPORATED FOR THE PURPOSE, THE SAME WOULD ONLY BE AN ASSOCIAT ION OF PERSONS (AOP), A SEPARATE TAXABLE ENTITY THOUGH. THE EXPENSES, WHICH STAND NO W WRITTEN OFF, I.E., ON THE JV OR THE PROJECT OWNER BEING NO LONGER INTERESTED IN EXECUTI NG THE PROJECTS/S, WAS, FIRSTLY, ONLY AND ON BEHALF OF THE JV OR THE AOP AFORESAID. THE ASSES SEE WAS MERELY FINANCING THE EXPENDITURE FOR THE TIME BEING AS A PROMOTER OF A M EMBER OF THE SAID AOP. THE AMOUNT REPRESENTED ONLY A CLAIM RECEIVABLE; THAT RECEIVED FROM JPPL BEING THE EXTENT TO WHICH THE PROJECT DEVELOPMENT STOOD, UNDER THE CIRCUMSTAN CES, FINANCED BY IT; THE POSITION OF JPPL BEING PARA MATERIA WITH THAT OF THE ASSESSEE. THE LOSS UNDER REFERENC E IS THEREFORE OF THE AOP, AND NOT THE ASSESSEES LOSS; THE BALANC E LOSS BEING BORNE BY JPPL, ITS JV PARTNER OR ASSOCIATE. THESE AMOUNTS, WERE THE PROJE CT/S TO BE SET UP, RECORDED IN THE BOOKS OF THE JV OR THE PROJECT OWNER AS TOWARD PROJECT CO ST. SECONDLY, AND WITHOUT PREJUDICE, THE EXPENSES WERE INCURRED FOR PROJECT DEVELOPMENT, I.E., ON CAPITAL ACCOUNT. AS SUCH, THE LOSS, EVEN IF CONSIDERED AS OF THE ASSESSEE-COMPANY, IS IN THE CAPITAL FIELD; THE RELE VANT EXPENDITURE HAVING BECOME INFRUCTUOUS ON THE ABANDONING THE PROJECT OR ON DEC IDING ON NOT CARRYING OUT THE PROJECTS, BEING NOT VIABLE UNDER THE CIRCUMSTANCES. THE BULK OF THE EXPENDITURE INCURRED (RS.57.92 LACS), AS WELL AS ITS PART REIMBURSEMENT FROM JPPL , IS FOR THE FIRST YEAR, I.E., FY 2001-02, TOWARD INITIALIZING THE PROJECT, AS IS ALSO EVIDENT FROM THE NATURE OF THE EXPENDITURE INCURRED. THE SAME WERE THEREFORE CLEARLY TO SET UP POWER PROJECT/S, A CAPITAL ASSET/S, AND DO NOT BY ANY SCORE REPRESENT THE STOCK-IN-TRADE OF THE ASSESSEES BUSINESS, AND WHICH WAS TO BE REALIZED BY OPERATING THE SAID PROJECTS AND S ALE OF POWER GENERATED THERE-FROM TO PSEB. THERE IS FURTHER, TO OUR MIND, NO QUESTION O F ANY RATE HAVING BEEN NEGOTIATED EARLIER, AS THE ALLOTMENT (OF THE PROJECT) WAS MADE IN AN OPEN, TRANSPARENT AND COMPETITIVE MANNER. AND, FURTHER, THE POWER TARIFF WAS TO BE DE CIDED SUBSEQUENTLY ON REFERENCE TO THE REGULATORY BODY, WHICH WAS TO, AS IT ACTUALLY DID, DECIDE ON THE SAME AFTER HEARING ALL THE PARTIES, INCLUDING THE NODAL AGENCY (PEDA) FOR IMPL EMENTING THE POLICY UNDER WHICH THE POWER PROJECTS WERE BEING SET UP. WHAT, THEREFORE, WOULD HAVE BEEN AGREED UPON AT THE 7 ITA NO.2356 /MUM/2010 (A.Y. 2006-07) BERMACO ENERGY SYSTEMS LTD. VS. ASST. CIT PRE-NEGOTIATION STAGE WOULD BE THE BASIS OF ARRIVIN G AT THE TARIFF, AS, SAY, THE RATE OF RETURN THAT THE POWER PROJECT SHOULD YIELD TO THE PROJECT OWNER. THE ACTUAL RATE WOULD DEPEND ON THE FINANCIAL DATA ON VARIOUS PARAMETERS. IN FACT, WE NEED NOT TRAVEL INTO THIS AREA FURTHER; THE DECISION NOT TO CONTINUE WITH THE PROJECT, DESP ITE HAVING SPENT SO MUCH TIME AND RESOURCES THEREON, BEING DECIDEDLY A BUSINESS DECIS ION, TAKEN IN BUSINESS INTEREST. THE SAME WOULD NOT, HOWEVER, CONVERT WHAT IS ESSENTIALL Y A CAPITAL EXPENDITURE TO OF REVENUE NATURE. CAPITAL EXPENDITURE, IT MAY BE APPRECIATED, IS INCURRED AS MUCH FOR BUSINESS PURPOSES AS IS THE REVENUE EXPENDITURE. HOWEVER, IT IS ONLY THE LATTER WHICH IS DEDUCTIBLE IN COMPUTING THE BUSINESS INCOME, WHILE SPECIFIC AL LOWANCES, AS U/SS.32, 35, 35D, ETC. ARE PROVIDED FOR UNDER THE ACT IN RESPECT OF THE FORMER . IN THE INSTANT CASE, THE TRANSACTION NOT FRUCTIFYING HAS LED TO A LOSS OF CAPITAL, SO THAT T HE REVENUES STAND IS IN AGREEMENT WITH THE SETTLED POSITION OF THE LAW. REFERENCE IN THIS CONTEXT MAY BE MADE TO THE DECISIONS BY THE HONBLE APEX COURT IN THE CASE OF HASIMARA INDUSTRIES LTD. V. CIT [1998] 230 ITR 927 (SC), WHEREAT, AGAIN, THE CLAIM OF LOSS OF DEPOSIT AS A BUSINESS LOSS U/S.28 OF THE ACT WAS PRESSED. IN THE FACTS OF THAT CASE, THE ASSESSEE HA D DEPOSITED RS.20 LACS WITH THE LICENSOR COMPANY FOR THE PURPOSE OF SECURING A LICENSE UNDER WHICH THE ASSESSEE HAD ACQUIRED TO WORK THE LICENSORS COTTON MILLS. THE DEPOSIT, IT W AS HELD, WAS MADE, CLEARLY, FOR ACQUISITION OF A PROFIT-MAKING ASSET, TO CARRY ON T HE BUSINESS IN COTTON. THE LOSS OF SUCH DEPOSIT, ON IT REMAINING UNPAID, FOLLOWING THE LIQU IDATION OF THE LICENSOR COMPANY, WAS SUFFERED ON CAPITAL ACCOUNT AND NOT ON REVENUE ACCO UNT, SO AS TO BE TREATED AS A BUSINESS LOSS. THE SAID DECISION, EVEN AS THE EXACT FACTS WO ULD BE SPECIFIC AND UNIQUE TO THE FACT SITUATION OF EACH CASE, IN OUR CLEAR VIEW, IS SQUAR ELY APPLICABLE IN ITS RATIO. RATHER, FIRST PRINCIPLES ADMIT OF NO DIFFERENCE, SO THAT THE SAID DECISION WAS PUT FORTH ONLY TO IMPRESS THE UNEQUIVOCAL AND THE SETTLED POSITION OF LAW IN THE MATTER, I.E., AS AN EXAMPLE OF THE APPLICATION OF THOSE PRINCIPLES BY THE HONBLE APEX COURT. IN THE CASE OF HASIMARA INDUSTRIES LTD VS. CIT [1998] 231 ITR 842 (SC), AGAIN, THE LOSS QUA IRRECOVERABLE ADVANCE TO THE LESSOR, ON ACCOUNT OF THE LATTERS I NCAPACITY TO REPAY, WAS HELD AS A CAPITAL LOSS; THE SAME HAVING BEEN MADE BY THE ASSESSEE-LEA SEE TO MODERNIZE THE COTTON MILL UNDER A LEAVE AND LICENSE AGREEMENT, OBTAINING OPER ATING RIGHTS IN ITS RESPECT WITH AN 8 ITA NO.2356 /MUM/2010 (A.Y. 2006-07) BERMACO ENERGY SYSTEMS LTD. VS. ASST. CIT INTENTION TO ENTER THE COTTON MANUFACTURING BUSINES S. RELIANCE IS ALSO PLACED ON THE DECISION IN THE CASE OF INDIAN ALUMINIUM CO. LTD. VS. CIT [1971] 79 ITR 514, 518 (SC) AND CIT VS. SUBRAMANYA PILLAI (S.R.) [1950] 18 ITR 85, 93 (MAD.), TO THE EFFECT THAT ON LY LOSSES ARISING OR SPRINGING DIRECTLY FROM THE CARRY ING ON OF THE TRADE OR BUSINESS AND INCIDENTAL THERETO ARE DEDUCTIBLE, WHILE THOSE NOT ARISING OUT OF THE OPERATIONS OF THE TRADE OR BUSINESS ARE REALLY LOSSES OF CAPITAL. REFERENCE IN THIS CONTEXT MAY ALSO BE MADE TO THE DECISION BY THE TRIBUNAL IN THE CASE OF INTEGRATED TECHNOLOGY SOLUTIONS PVT. LTD. V. ITO (IN ITA NO. 3695/MUM/2011 DATED 28/6/2013). WE MAY AT THIS STAGE ALSO CLARIFY THAT IN DISCUSSIN G THIS GROUND OF APPEAL, WE HAVE RELIED UPON THE MATERIAL ON RECORD, INCLUDING THE A SSESSEES SUBMISSIONS BEFORE THE AUTHORITIES BELOW. OUR FINDINGS ARE IN FACT ONLY AN ENDORSEMENT OF THOSE BY THE ASSESSING AUTHORITY (REFER PARA 4 OF THE ASSESSMENT ORDER). F URTHER, THE ASSESSEES ARGUMENT OF THERE BEING NO JV, RAISED DE HORS ANY MATERIAL ON RECORD, IS IN FACT CONTRARY TO THE ASSESSEES CASE AS WELL AS THE MATERIAL ON RECORD, I.E., REPRE SENTS A NEW CASE ALTOGETHER, THOUGH, AS WOULD BE APPARENT FROM THE FOREGOING, TO NO MOMENT. WE FURTHER OBSERVE THAT THE AMOUNT IN RESPECT OF TH E JOINT VENTURE WRITTEN OFF IS AT RS.48.24 LACS ONLY, WHILE THE IMPUGNED AMOUNT, I.E. , PER THE ASSESSEES GROUND `A IS AT RS.49,65,446/-, WHICH WE FIND TO BE IN AGREEMENT WI TH THE AMOUNT ACTUALLY WRITTEN OFF AND ADDED BACK IN ASSESSMENT (RS.49,65,556/-), LEAV ING A BALANCE, SO THAT THERE ARE AMOUNTS IN THE SUM OF RS.1.41 LACS APART FROM THE W RITE OFF IN RESPECT OF THE JV AFORE- REFERRED. HOWEVER, THERE IS NO REFERENCE TO THESE A MOUNTS NOR ANY DETAILS THEREOF, EITHER IN THE ASSESSMENT ORDER OR IN THE IMPUGNED ORDER. EVEN NO SUBMISSIONS IN THIS REGARD WERE MADE BEFORE THEM OR BY THE LD. AR BEFORE US. UNDER THE CIRCUMSTANCES, THEREFORE, WE HAVE NO BASIS TO MODIFY THE FINDINGS IN RESPECT OF THIS AMOUNT, WHICH STANDS ADDED BACK SIMILARLY. OUR DECISION WOULD THEREFORE BE IN RESPE CT OF THE ENTIRE IMPUGNED AMOUNT OF RS. 49.65 LACS. WE DECIDE ACCORDINGLY. 6. THE ASSESSEES SECOND GROUND IS IN RESPECT OF DI SALLOWANCE FOR THE SUM OF RS.2,87,061/- ON ACCOUNT OF INTEREST. THE ASSESSEE S ACCOUNTS BORE AN INTEREST EXPENDITURE 9 ITA NO.2356 /MUM/2010 (A.Y. 2006-07) BERMACO ENERGY SYSTEMS LTD. VS. ASST. CIT AT THE IMPUGNED AMOUNT OF RS.2,87,061/-, AS WELL AS INVESTMENTS TO THE TUNE OF RS.376.32 LACS, AS ALSO EARNINGS BY WAY OF SHORT TERM CAPITAL GAIN ON SALE OF EQUITY SHARES AT RS.13.64 LACS, THE A.O. DISALLOWED THE INTEREST INF ERRING THE APPLICATION OF THE BORROWED FUNDS FOR INVESTMENTS IN EQUITY SHARES YIELDING CAP ITAL GAINS, SO THAT THE SAME CANNOT BE ALLOWED AS A BUSINESS EXPENDITURE. IN APPEAL, THE L D. CIT(A), NOTING THE AFORESAID FACTS, FINDING THAT NO EXPLANATION HAD BEEN ADVANCED BY TH E ASSESSEE BEFORE THE AO, CONFIRMED THE SAID DISALLOWANCE. 7. BEFORE US, THE ASSESSEES CASE WAS OF SUFFICIENT OWN FUNDS, I.E., TO FUND THE INVESTMENTS, WHICH WERE AT RS. 1.52 CRORES AT THE B EGINNING OF THE YEAR, WHILE THE LD. DR WOULD STATE OF THE SAID CONTENTION/S HAVING BEEN CO NSIDERED BY THE LD. CIT(A). A BARE REFERENCE TO THE BALANCE-SHEET (PB PGS. 4-20 ), WOULD SHOW THAT THE ASSESSEE-COMPANY IS A PROFITABLE COMPANY, DISCLOSIN G A PROFIT OF RS.133.06 LACS FOR THE CURRENT YEAR; THE AGGREGATE OF SHARE CAPITAL AND RE SERVES AND SURPLUS BEING IN EXCESS OF RS.950 LACS AS AT THE YEAR-END. THE INVESTMENT IN F IXED ASSETS, ON THE OTHER HAND, IS ONLY AT RS.90 LACS, OF WHICH RS.38 LACS IS FINANCED BY W AY OF SECURED LOANS. SIMILARLY, THE INVESTMENT IN THE CURRENT ASSETS, NET OF CURRENT LI ABILITIES, IS AT RS.116 LACS ONLY. IT IS THUS NOT UNDERSTAND AS TO HOW IT COULD BE SAID THAT THE AMOUNT INVESTED BY THE ASSESSEE IN SHARES AND SECURITIES, BEING AT RS.376 LACS AS AT T HE YEAR-END, IS OUT OF BORROWED FUNDS, WHICH, APART FROM SECURED LOANS, WHICH ARE FOR FIXE D ASSETS (AS NOTED HEREINABOVE), ARE BY WAY OF UNSECURED LOANS AT RS.641 LACS. UNDER THE CI RCUMSTANCES, THEREFORE, WE FIND NO BASIS FOR THE DISALLOWANCE OF FINANCIAL EXPENSES, W HICH STANDS INCURRED AT A MINIMAL AMOUNT, I.E., IN RELATION TO THE BORROWINGS, OF WHI CH THE SECURED LOANS (RS. 38 LACS AS AT THE YEAR-END) WE HAVE FOUND TO BE FOR THE FINANCING OF VEHICLES. NO CASE FOR DISALLOWANCE, LOOKING AT THE FINANCIALS IN ANY MANN ER, IS THUS MADE OUT. THE IMPUGNED DISALLOWANCE IS ACCORDINGLY DIRECTED FOR DELETION. 8. THE THIRD AND FINAL GROUND BY THE ASSESSEE, I.E. , GROUND C, IS IN RESPECT OF CONFIRMATION OF THE DISALLOWANCE UNDER SECTION 14A BY THE A.O. AT RS.163840/-, WORKED OUT BY APPLYING RULE 8D(2)[(II) AND( III)]; THE ASS ESSEE HAVING EARNED DIVIDEND INCOME AT 10 ITA NO.2356 /MUM/2010 (A.Y. 2006-07) BERMACO ENERGY SYSTEMS LTD. VS. ASST. CIT RS.2,95,810/- FOR THE YEAR. THE ASSESSEES CASE IS THAT R. 8D IS NOT MANDATORY FOR THE YEAR, WHILE THAT OF THE REVENUE IS THAT THE SAME NEVERTHE LESS IS A REASONABLE BASIS FOR DISALLOWANCE. 9. RULE 8D, THOUGH NOT MANDATORY FOR THE CURRENT YE AR, YET CAN NOT BE SAID TO BE UNREASONABLE, SO THAT THE SAME CAN ONLY BE SAID TO BE FORM A REASONABLE BASIS FOR THE DISALLOWANCE U/S. 14A(1). HAVING SAID THAT, WE WOND ER AS TO HOW THE REVENUE COULD INVOKE R. 8D(2)(II), DISALLOWING INTEREST EXPENDITU RE THERE-UNDER; HAVING ALREADY DISALLOWED THE ENTIRE INTEREST U/S. 36(1)(III). IN FACT, WE HAVE FOUND THE ENTIRE OF IT AS ALLOWABLE AS A BUSINESS EXPENSE U/S. 36(1)(III), CO NSIDERING THE SOURCES AND APPLICATION OF FUNDS (REFER PARA 7 SUPRA), SO THAT NO DISALLOWANCE QUA INTEREST EXPENDITURE U/R. 8D(2(II) WOULD ARISE IN THE FACTS AND CIRCUMSTANCES OF THE C ASE. WE, THEREFORE, DIRECT RESTRICTION OF THE DISALLOWANCE QUA DIVIDEND INCOME U/S. 14A TO THE AMOUNT DETERMINED WITH REFERENCE TO R. 8D(2)(III) ONLY, I.E., TOWARD INDIRECT EXPEND ITURE, EVEN AS NO INFIRMITY IN ITS WORKING, NOR FOR NON INVOCATION OF THE FORMULA SUGGESTED THE REBY FOR THE SAME, HAS BEEN BROUGHT TO OUR NOTICE BY THE ASSESSEE. WE DECIDE ACCORDINGLY. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. .+ / %01. ' , & 2 ' 34 5 ORDER PRONOUNCED IN THE OPEN COURT ON JULY 03, 2013 , ' )*+ $ 6 7%/ $ I' 03, 2013 ' =' 5 SD/- SD/- ( B.R. MITTAL ) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER $ ' MUMBAI; 7% DATED : 03.07.2013 ASHISH KUMAR SINGH , PS 11 ITA NO.2356 /MUM/2010 (A.Y. 2006-07) BERMACO ENERGY SYSTEMS LTD. VS. ASST. CIT ! ' #$%& ' &$ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. ! / THE RESPONDENT 3. $ > ( ) / THE CIT(A) 4. $ > / CIT - CONCERNED 5. A&B= ! %C0 , ( C0+ , $ ' / DR, ITAT, MUMBAI 6. =D1 E' / GUARD FILE ! ( / BY ORDER, )/(* + (DY./ASSTT. REGISTRAR) , $ ' / ITAT, MUMBAI